11 July 2015 – As the vision of extracting oil and gas from previously impenetrable North American shale rock began to take shape in 2008 and 2009, moneyed interest across the globe began to accrue. And perhaps none were so eager to tackle the technology and the rewards as those in power at Chinese state-owned energy companies.
Between 2009 and 2013, the Chinese national companies China National Offshore Oil Corp. (CNOOC), Sinopec and Sinochem launched more than $8.6 billion in the United States transactions.
The last deal between a U.S. company and a Chinese company was in early 2013, Foster Mellen, a senior strategic industry analyst at the Ernest & Young Oil & Gas Center, told Rigzone. Most of those deals involved a Chinese national oil company (NOC) buying into an existing development, often as a joint venture partner. “Chinese NOCs have generally pulled back from international acquisitions in the last two years,” he said.
The reason? On-going corruption at the top of the Chinese oil and gas food chain. In March, the former chairman of the state-owned parent company of PetroChina Ltd. was indicted for allegedly abusing his position at China National Petroleum Corp., taking bribes and embezzling funds that led to losses of public money. A series of other top executives at state-owned Chinese oil producers have also been implicated, many of them indicted, fired or in jail.
In recent years, the Chinese government’s leadership has cracked down on alleged corruption, particularly at its four state-owned oil and gas companies. Things have slowed down for Chinese energy investment across the globe, but particularly in the United States.
And there are a few reasons for that deceleration, Mellen said. “The U.S. is just one part of an international program for the Chinese,” Mellen said. “In the Middle East, Africa, you name it – things have slowed down globally.” New Chinese investment in Canada subsided, too.
A subsidiary of PetroChina entered a joint venture with Encana in which the subsidiary invested roughly C$2.18 billion in 2012 ($1.71 billion in current U.S. dollars) for a 49.9 percent working interest to jointly explore and develop certain lands in the Duvernay resource play in Alberta. A further investment from PetroChina of C$1.0 billion ($785 million in current U.S. dollars) is earmarked to fund half of Encana’s capital funding, Encana spokesman Doug McIntyre told Rigzone.
*“Third-party capital from joint ventures such as this one helps to achieve immediate recognition of value while de-risking our capital program on early life resource plays such as the Duvernay,” McIntyre said. “With an over 1,000-well drilling inventory, we estimate it would have taken us decades to fully develop this resource ourselves. Over the long term, this deal allows us to accelerate development of this asset.”
Generally when a large company, especially a multinational one, makes a big acquisition, there’s a pause while the new assets are integrated into an efficient enterprise, EY’s Mellen explained. Secondly, however, Chinese internationalization has slowed as investigations are underway in wide-ranging corruption scandals across several businesses, including oil and gas.
“The [Chinese] government really set itself to root out, root and branch, and bribery, malfeasance, and some of the big [state-owned] oil companies were dragged into that,” he said. “Several managers were removed and still could go to court, but the [business] response has been to largely hunker down until the political firestorm is over.”
Western oil companies are still engaging in some work with the Chinese NOCs, but the activity has pared down significantly.
Ssome companies in the United States are more than happy to work with the Chinese, Mellen added. For example, in 2013, Cheasapeake Energy Corp. needed to dispose of expensive assets – and quickly. Cheasapeake sold half of its oil and gas assets in Oklahoma to Sinopec for $1 billion.
“They needed lots of money, and the Chinese were very willing and very interested to buy into the U.S. unconventional revolution,” Mellen said.
What’s more, once things in this cyclical industry – and China’s corruption woes – come full circle, Mellen will likely return to the U.S. energy industry.
“Particularly after the downturn, a good number of companies will be looking to sell out some interest to get back on feet. I wouldn’t be surprised to see more Chinese money coming in,” he said, adding, “I think people are kind of waiting to see if we’ve really bottomed out: Is the price going forward up from $60, or will it be another retreat into the $40s or $50s. Once we get a consensus feeling that things have stabilized and should start to get better, we should see more M&A activity, possibly even later this year.”
Still, the fundamentals at the Chinese NOCs remain strong, despite the downturn and despite the cuts in capital expenditure, John England, chief of Deloitte LLP’s U.S. oil and gas practice, told Rigzone. “The balance sheets of the Chinese NOCs are still quite strong, so I think they’ve got the capability to do some more acquisitions and I think they’re still interested in acquiring resources wherever they can,” England told Rigzone.
“More recently, there are changes in leadership over there, so I think it may take some time just to determine what will be the strategies of the new leaders that are coming in to play.” Regardless of who’s in leadership at the Chinese state companies, their interest in North American shale – its technology and its assets – hasn’t waned.
“They have a mandate to go out and try to acquire resources and they see the same macroeconomics that we do. They’re a huge consumer of energy, and so they want to make sure they’re getting supplies, getting access to supplies, broadly around the globe,” England said.
“The Chinese are logical buyers for assets here, particularly when you think the IOCs are changing around their portfolios. Some of the independents will be cash-strapped and so they’re potentially sellers. I think the Chinese NOCs are logical buyers; they’re just having to overcome some internal strife right now. It’s just a question of when they get those sorted out, but it’s reasonable to think they’ll be back in the market.”
Mark Schwartz, vice chairman of Goldman Sachs, said in a 2014 presentation on economic opportunities and challenges behind the red curtain that he is confident about China’s future. “China is coming out of a period of rapid growth – almost 10 percent per annum growth over the last thirty years. In 2013, China’s GDP was 9.3 trillion – the second largest economy in the world. In 2013, China contributed 28 percent of total GDP growth globally. For all of the great outcomes of rapid growth, inefficient capital, more focus on state-owned enterprises … environmental standards.”
As essential as China’s growth is toward embracing opening of its markets, that may be delayed in light of the corruption probe that’s drawn much activity to a halt. But hope remains. “Reform allowing for much greater transparency and much greater opportunity for Chinese companies to invest in the U.S. and likewise, for U.S. companies to invest in China. That’s necessary to create a more level playing field,” Schwartz said.
“This is a period of historic change in China. There haven’t been many periods in history as exciting and as fascinating as this. I do foresee a decade of meaningful reform, a decade of slower growth, but higher quality growth, more sustainable growth, and growth that represents a greater standard of living for 1.4 billion Chinese. I’m confident about China.”
*Deon Daugherty -Rigzone